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A recent Ninth Circuit Court of Appeals opinion upended long-standing precedent under which employers could rely on prior salary data to justify pay differences between employees of different genders when defending claims under the Equal Pay Act of 1963 (EPA). The EPA prohibits paying different amounts to male and female employees for doing equal work except when made pursuant to a seniority system, a merit system, a system which measures earnings by quantity or quality of production, or for “a differential based on any other factor other than sex.”

In Rizo v. Yovino, 2018 U.S. App. LEXIS 8882 (9th Cir. Apr. 9, 2018), the Ninth Circuit analyzed whether pay differentials based on prior salary history were an exception to the EPA prohibitions because they are based on a “factor other than sex.” The court decided they were not, holding that prior salary cannot justify gender-based pay differences when the employees are performing equal work. In short, Rizo learned some of her male colleagues who were hired after she was earned higher salaries. Her employer did not dispute this, but argued it was permissible because it set the starting salaries based on what its employees had earned at their previous jobs. In this case, that resulted in Rizo being paid less than men with similar skills and experience.

Overruling Kouba v. Allstate Ins. Co., 691 F.2d 873 (9th Cir. 1982), the court held an employee’s prior salary does not constitute a “factor other than sex” upon which a wage differential may be based. The court said “any other factor other than sex” is limited to legitimate, job-related factors such as a prospective employee’s experience, educational background, ability, or prior job performance.

Although some states and municipalities (not North Carolina and none in North Carolina) have recently passed laws prohibiting gender based pay differences based on prior salary history, Rizo marks a major change in interpreting the EPA, and creates new risks for employers. Many employers likely rely on prior pay history to justify current pay differentials, and that reliance may expose them to significant liability. Although the Ninth Circuit does not cover North Carolina, it would not be surprising to see other Circuit Courts rely on Rizo to make similar rulings. At a minimum, plaintiffs may be emboldened to bring EPA claims against employers arguing Rizo entitles them to relief where none was previously available. Prudent employers should audit their employees’ pay to determine if gender disparity exists, and if so, either close the disparity or identify an exception to the EPA other than prior salary history to justify the disparity.

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